Weak FoF Returns; Clients Leave

Chidem Kurdas (MATERIAL ADDED 2/13)

2012 was a bad year for fund of funds. Even some highly regarded managers did not do well. Thus a multi-billion-dollar portfolio of big-name hedge funds, run by General Motors’ pension manager for institutional investors, ended the year almost flat.

This was in contrast to hedge fund indexes, which gained around 8%, while the S&P 500 returned 16%.

Investors say the lower returns of fund of funds compared to hedge fund indexes are to a significant extent due to their fees and other expenses.  As a result, fund of funds continue to lose customers, in particular among institutions.

Large investors’ moving out of the sector, a trend that started with the financial crisis, may be accelerating. Industry people have been commenting on this pattern. Och-Ziff chief Dan Och said that the ongoing rotation of capital from fund of funds to direct investment strategies affects the pace of industry flows. He was speaking at a conference call.

Och-Ziff may be among the beneficiaries of this rotation. Its multi-strategy funds reallocate capital among markets and asset classes as conditions change, which is a function investors looked for funds of funds to perform. The advantage is that because Och-Ziff is a hedge fund manager that makes all the investment decisions, there is no second layer of fees as with a fund of funds.

Barclay Hedge and TrimTabs report that net $44.3 billion of assets – almost 8% of the sector total – left fund of funds in 2012. Since January 2010, a time that roughly corresponds to the end of the crisis, hedge funds received $88.3 billion new capital but funds of funds had $80.8 billion in outflows.

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